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Telcos face tough road on 'Net neutrality'

On June 28, a Senate committee approved a bill that would free phone carriers and cable operators from key restrictions on how they set fees for delivering Internet content. But telcos shouldn't break out the champagne just yet.
/ Source: BusinessWeek Online

AT&T and other big phone-service providers had reason to celebrate last week. On June 28, the Senate Commerce Committee, chaired by Senator Ted Stevens (R-Alaska), approved a bill that would free phone carriers and cable operators such as Comcast from key restrictions on how they set fees for delivering Internet content.

Many hailed the vote as good news for the likes of AT&T Chief Executive Ed Whitacre and his counterpart at Comcast, Brian Roberts. It means that the most significant piece of telecom legislation since the 1996 Telecom Act could be shorn of what the phone-service providers call unnecessary and burdensome constraints on their right to set prices for network use.

Tough road ahead
Those rules are particularly onerous to traditional phone companies like AT&T and Verizon, which are spending billions of dollars to lay fiber cables to deliver TV service to rival what's already available from cable and satellite providers. They want the freedom to set fees for Internet companies such as Google and Yahoo that push their own content over telco TV pipes. The telcos' argument: Constraints on the ability to charge higher fees for premium content—what proponents call "Net neutrality rules"—would mean less economic incentive to invest in network upgrades, slowing the speed of information sent over the Internet for everyone.

Judging from the Senate committee vote, it would appear that argument has won the day. But Whitacre better not break out the champagne just yet. A long, tough road remains in the battle over control of content riding over the Internet. The Senate committee vote has to be approved by a majority of the full body, and then reconciled with a draft of the bill in the House of Representatives. And it all has to be accomplished in a short legislative session interrupted by holiday breaks and the approaching November elections.

What's more, the longer it takes to get the law passed, the longer telecom companies have to do without a raft of other hoped-for goodies. For example, the Senate bill would make it easier for them to enter TV markets across the country and begin competing head-to-head with cable providers. The Senate bill also would prevent state governments from stepping in and regulating certain wireless and Internet-based phone services.

Horse trading
Victory in the full Senate isn't assured. The committee vote fell largely along party lines, with Democrats favoring strict Net neutrality and Republicans like Stevens against it. It may be difficult for the telcos to gain final passage in the full Senate, where Republicans have a slim majority, and may see more defections on this issue, UBS telecom analyst John Hodulik wrote in a recent report.

The upshot: All the horse-trading still to come means that a final bill might not be passed this time around, requiring the process to start anew in the next legislative session. Or, if a bill is agreed upon, some variant of Net neutrality or state regulation of other telecom services—unwelcome by the industry— could still find its way into the final draft.

Full passage would require Stevens to get 60 votes on his side to end debate on the Senate floor. But Stevens has stated that he does not have the necessary 60 votes. And, "the chairman is not going to bring it to the full Senate until he's confident that we have the 60 votes," says Matthew Flanigan, president of TIA, a trade group of telecom equipment suppliers.

Playing catch-up
The telcos and their supporters will no doubt lobby hard to win over the necessary number of senators. But with so many other issues of national importance before the Senate, that's far from guaranteed. And no bill at all before November would be a monumental loss for Whitacre and his telco peers and a victory for their chief foes, the cable companies run by Roberts and others.

Why? At the core of this legislative scrap is the wherewithal to deliver video services to customers all across the country. Phone companies are making a push into TV as cable companies steal customers with new Net phone products. By 2010, the telcos will have lost 20 percent of their voice lines to cable competitors, and revenue per customer will drop from about $40 per voice line today to less than $35, according to researcher Sanford C. Bernstein.

If the telcos don't soon match cable's three-product package of phone, Internet, and video service, they risk falling dangerously behind in the race to win customer loyalty over the next decade. "We expect accelerating access line losses (from phone companies) throughout the next three years" as cable companies are able to market their full lineup of products to their customers by 2007, Bernstein's Jeff Halpern told analysts in a recent conference call.

Fast track to TV
Another crucial element of telecommunications law centers on the process of applying for licenses to sell TV services in new markets. Currently, phone companies must apply for franchise licenses on a city-by-city basis—a process that could take years and slow the telcos' TV rollout to a crawl. AT&T and Verizon want legislation that lets them apply for a nationwide license.

The Senate committee, hoping to stimulate competition, is open to putting phone companies' TV plans on the fast track. Its bill essentially allows for TV franchising to be determined at the national level by setting a time limit of 90 days for local government to grant the franchise. If not acted upon after 90 days, the franchise is deemed approved for 15 years. But again, Stevens needs full Senate approval, and leaving TV licenses in the hands of national regulators looks as though it faces opposition among some in the full Senate.

Another part of the Senate bill that hasn't gotten much ink involves the interconnection of Internet phone services. The bill clears the way for Vonage and other providers of so-called Voice over Internet Protocol (VoIP) services to have the same rights as traditional phone companies—but also the same obligations—when it comes to offering service. The law also says these Net-phone companies must offer emergency 911 service, and that any VoIP provider must have nondiscriminatory network access to offer E-911.

Running out of time
Industry experts also say that any new law is likely to have provisions around what's known as the Universal Service Fund, which requires telecom providers to pay into a fund that ensures rural and low-income areas get the same services as the rest of the country. The House bill does not address this, but the Senate version does. With universal service being a priority in Stevens' home state of Alaska, the senator will no doubt be squabbling with House reps to get it into final legislation, if the bill gets that far this year.

In reality, though, things like universal service are "a fly on the back of the elephant," says the TIA's Flanigan. The big issue remains Net neutrality. As Congress haggles over these issues in the coming weeks, the telcos hope Net neutrality doesn't find life again. To keep it down, they'll have to ward off lobbyists from the likes of Google and Yahoo, who want desperately to get it back on the agenda (see, 6/08/06, "Web Titans' D.C. Blues").

For now, the big phone companies have the upper hand, with Net neutrality headed toward its grave. But with so much debate left in Congress and so little time to reach agreement, the issue is still on life support.